Is Earnest Money Refundable?

Gina writes: We recently bought a lot in Point Cook, VIC, Australia. We signed the contract and made a 10% deposit, but the deal has not closed yet.

Before we signed the contract, the master plan showed that the lots across the road were individual lots. The salesperson told us that these lots would be used for display homes. But now the five lots cross road are being used to build a child-care center.

Can we cancel the contract and get our 10% deposit back?

Steve Bliss, of BuildingAdvisor.com, responds: I’m not sure about real-estate law in Australia, but in the US, real estate deals are governed largely by what is in the written contract – in this case the purchase-and-sales agreement (P&S) that you signed when you made your deposit, called “earnest money”.

The agreement should spell out the reasons for which you can cancel the contract and be refunded your earnest money – for example, the buyer not getting financing, the seller not meeting certain dates, or the land (or house) not meeting inspection requirements. In addition to the standard language, buyers often add their own contingencies such as the passing of a perc test, inspection, etc.

Beyond what is in the written contract, the rule of “caveat emptor” (let the buyer beware) largely prevails except in the case of fraud. If you can show intentional fraud on the part of the seller – for example, if they disguised the fact that the land has buried toxic waste – then most courts here would find in your favor. Whether or not your situation would be considered fraudulent would depend on case law in your country.

The difficult part, often, is proving that the seller grossly misrepresented things verbally, as opposed to putting it in writing. For example, the sales people could deny that they ever told you how the lots across the street would be used, or that could say that they were not aware that a child care center was planned.

If your deposit is held in escrow, as it should always be, then it will generally not be released until the parties sign off. In the event of dispute, it can get tricky and depend on both the language of the P&S and the policies of the escrow holder – typically a title company or the seller’s lawyer.

Regardless or your legal right to a refund, the practical problem would be the cost of going to court to get a refund if the seller does not cooperate. The cost would far exceed the amount of the deposit.

If it were me, I would start by scheduling a meeting with the developer, as soon as possible, to request a refund in writing – stating in writing your reasons. Be polite, but firm, and don’t say that you were deliberately misled – simply that you were informed by the master plan and the salespeople that the nearby lots were to be used for display homes, not a child-care center.

Hopefully, they will cooperate and give you a refund. If that fails, I would schedule a brief meeting with a lawyer experienced in real-estate law to explore your legal options.

If the future, you may want to get legal advice – or advice from a buyer’s broker – before making a deposit, for ways to protect your earnest money. I always try to put a broad contingency clause in any offer – something about the property inspection being “satisfactory to the buyer, solely at the discretion buyer’s discretion.” If you have a specific concern about a property, always add an appropriate contingency to your offer — you can get creative with these.  Who holds the earnest money in escrow can also be important. Never give it directly to a seller to hold in his personal account.

Follow Up:

Dear Steve,

Just would like to let you know, after a long negotiation with the land developer, we both agreed to cancel the contract with all the money refunded. Thank you for your advice.  — Gina

See also:  Seller Won’t Refund Earnest Money

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